One of the major talking points often seen in financial news is the amount of debt held by the average Canadian. When the debt levels of an average Canadian household increases from just 60% in the 1980s to over 150% in 2011 according to Statistics Canada, it’s no wonder that there is a lot of fear and uncertainty when it comes to borrowing money or using credit.
In a previous article, we briefly discussed debt and some steps to take in order to help you manage that debt. If you haven’t read it yet, take a look here! One point that we brought up is that debt is not necessarily good or bad, because it all depends on how you choose to use it. For example, it’s perfectly acceptable for people to have mortgages and car loans, which are both forms of debt. The trouble comes when debt usage becomes a bit too… cavalier, and you end up with too much borrowed money across too many lenders. That’s when it becomes troublesome.
One solution to this is debt consolidation. Are you familiar with it? It’s the concept of combining all your loans into one loan. This can offer several advantages for you:
It’s a pain to have to deal with 3 or 4 different statements, and accordingly, multiple payments every single month. They may come in digitally via email, or even physical mail. When you consolidate your loans, you’ll be able to benefit by making one single monthly payment to one single lender, and that’s it.
One big problem with a credit card is that you never really know when you’re going to finish paying it off, especially if you’re only paying the minimum balance. They’re essentially open ended. Additionally, the interest rates may change, resulting in inconsistent payments. The great thing about consolidating your debt is that you can lock in your interest rate, in addition to setting the length of time on the loan. You’ll feel better knowing that you’re working towards a tangible goal, rather than feeling like your money is ineffective.
By paying off your loan quicker, your credit profile will look a lot better to future lenders when they see that you’re not using all the credit you have available. If you have $10,000 of credit available, but you’re only using $2,000 out of the possible $10,000, it is much better than using $9,000 out of the possible $10,000. How much of your total available credit you’re using is referred to as your “credit utilization”, which is actually one of the main factors when determining your credit score. The relatively lower amount of credit you’re using, the better it is for your score. Even more incentive to consolidate your loan!
There are many types of credit. One type of credit is called revolving credit, which is represented by your credit cards. Using a lot of revolving credit is not seen favourably by lenders. When you take on a personal debt consolidation loan to pay off your credit cards, you are changing your revolving credit into what’s called an installment loan. This may, in some cases, have a positive effect on your credit score.
Whether it’s the interest rate or the term length of the loan, when you consolidate your debt it can potentially be a great opportunity to reduce your overall interest costs, depending on your finances. Not only will you know exactly how much and for how long you’ll be paying, you’ll also know if you can save any money on your interest payments. Keep more money in your pocket. Who could say no to that!?
For someone who is currently carrying multiple forms of debt, using a debt consolidation program is definitely a great strategy to keep in mind. We recommend you check out the program here to find out if it’s the right strategy for you!
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.